A production theory of pure economic loss

Northwestern University Law Review

Volumn 104, Issue 1, 2010, Pages 49-104

  Rhee, Robert J ^a  

^a UNIVERSITY OF MARYLAND SCHOOL OF LAW   (United States)

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EID: 78149295703     PISSN: 00293571     EISSN: None     Source Type: Journal    
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References (514)

1. See Conn. Mut. Life Ins. Co. v. N.Y. & N.H. R.R., 25 Conn. 265, 270 (1856).
2. Cattle v. Stockton Waterworks Co., (1875) 10 L.R.Q.B. 453, 456
3. cf. Brown v. Kendall, 60 Mass. 292, 294 (1850) (intro-ducing fault as basis for accident law).
4. People Express Airlines, Inc. v. Consol. Rail. Corp., 495 A.2d 107, 109 (N.J. 1985)
5. ("[A] virtually per se rule barring recovery for economic loss unless the negligent conduct also caused physical harm has evolved throughout this century, based, in part, on Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303 (1927), and Cattle v. Stockton Waterworks Co." (internal citations omitted)).
6. See RESTATEMENT (SECOND) OF TORTS §§ 924(b), 924(d), 927(2), 928(b), 929(1)(b) (Am. Law Inst. 1974)
7. PROSSER AND KEETON ON THE LAW OF TORTS § 129, at 997 (W. Page Keeton et al. eds., 5th ed. 1984)
8. Ronen Perry, The Economic Bias in Tort Law, 2008 U. ILL. L. REV. 1573, 1577-78 [hereinaf-ter Perry, Economic Bias].
9. Scholars and courts have noted this puzzling dichotomy. See People Express Airlines, 495 A.2d at 109
10. P.S. Atiyah, Negligent and Economic Loss, 83 L.Q. REV. 248, 252 (1967)
11. Perry, Economic Bias, supra note 3, at 1574-75.
12. See, e.g., Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50, 55 (1st Cir. 1985) (Breyer, J.) ("These considerations of administrability and disproportionality, offer plausible, though highly abstract, 'policy' support for the reluctance of the courts to impose tort liability for purely financial harm.").
13. Fleming James, Jr., Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Ap-praisal, 25 VAND. L. REV. 43, 48 (1972) (explaining the rule as a "pragmatic objection").
14. Cf. Victor P. Goldberg, Recovery for Pure Economic Loss in Tort: Another Look at Robins Dry Dock v. Flint, 20 J. LEGAL STUD. 249, 275 (1991) [hereinafter Goldberg, Recovery for Pure Economic Loss in Tort] ("[D]octrine has been a significant factor in delimiting the boundaries.").
15. 275 U.S. 303, 304 (1927).
16. See infra Part I.A (discussing the fishermen exception).
17. James, supra note 5, at 45-46.
18. See Louisiana ex rel. Guste v. M/V Testbank, 752 F.2d 1019, 1023 (5th Cir. 1985) (en banc) (not-ing that the rule withstood "a sea of change in the tort law"). The rule also survived common law evolu-tion in England. Ronen Perry, Relational Economic Loss: An Integrated Economic Justification for the Exclusionary Rule, 56 RUTGERS L. REV. 711, 720 (2004) [hereinafter Perry, Relational Economic Loss].
19. Jane Stapleton, Comparative Economic Loss: Lessons from Case-Law-Focused "Middle Theory," 50 UCLA L. REV. 531, 536 (2002).
20. Gary T. Schwartz, American Tort Law and the (Supposed) Economic Loss Rule, in PURE ECONOMIC LOSS IN EUROPE 94, 96 (Mauro Bussani & Vernon Valentine Palmer eds., 2003).
21. James, supra note 5, at 48
22. see Perry, Economic Bias, supra note 3, at 1585-1604.
23. Robert L. Rabin, Tort Recovery for Negligently Inflicted Economic Loss: A Reassessment, 37 STAN. L. REV. 1513, 1522-26 (1985).
24. W. Bishop, Economic Loss in Tort, 2 OXFORD J. LEGAL STUD. 1 (1982).
25. Mario J. Rizzo, A Theory of Economic Loss in the Law of Torts, 11 J. LEGAL STUD. 281 (1982).
26. Perry, Economic Bias, supra note 3, at 1607-08.
27. See In re Kinsman Transit Co., 388 F.2d 821, 824-25 (2d Cir. 1968) (noting reliance on "circum-locution" to decide cases)
28. Pruitt v. Allied Chem. Corp., 523 F. Supp. 975, 980 (E.D. Va. 1981) (noting lack of "any articulable reason for excluding any particular set of plaintiffs").
29. See AARON D. TWERSKI & JAMES A. HENDERSON, JR., TORTS: CASES AND MATERIALS 367 (2d ed. 2008) (noting recent "explosion of interest").
30. In 2006, the Arizona Law Review published a twenty-one article symposium on the field of economic torts.
31. See 48 ARIZ. L. REV. 687 (2006)
32. see also Thomas J. Miles, Posner on Economic Loss in Tort: EVRA Corp. v. Swiss Bank, 74 U. CHI. L. REV. 1813 (2007) (discussing how a recent Judge Posner opinion demonstrates that the economic loss rule is con-sistent with other tort doctrines)
33. Perry, Economic Bias, supra note 3 (discussing political underpinnings of economic loss doctrine)
34. Perry, Relational Economic Loss, supra note 10 (proposing integrated eco-nomic justification for economic loss doctrine)
35. Stapleton, supra note 11 (proposing that courts adhere to precise legal reasoning to create a high level of predictability in economic loss cases).
36. Perry, Economic Bias, supra note 3, at 1574
37. see generally 9 PURE ECONOMIC LOSS (Willem H. van Boom et al. eds., 2004) (comparative study of the economic loss rule)
38. PURE ECONOMIC LOSS IN EUROPE, supra note 12
39. Helmut Koziol, Recovery for Economic Loss in the European Union, 48 ARIZ. L. REV. 871 (2006).
40. LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW 350-51 (3d ed. 2005)
41. see DOUGLASS C. NORTH, THE ECONOMIC GROWTH OF THE UNITED STATES 1790-1860, at 204 (1961) (noting that the pace of industrialization accelerated in the mid-nineteenth century).
42. Compare Byrd v. English, 43 S.E. 419 (Ga. 1903) (negligent severing of electrical cable on de-fendant's property causing electrical outage to plaintiff), with 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 750 N.E.2d 1097 (N.Y. 2001) (negligent collapse of a building causing street clo-sure).
43. See, e.g., EVRA Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir. 1982) (Posner, J.) (failure to transmit electronic funds)
44. Huggins v. Citibank, N.A., 585 S.E.2d 275, 276 (S.C. 2003) (bank negligence leading to identity theft)
45. cf. Hedley Byrne Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465, 467-69 (H.L. 1963) (bank misrepresentation concerning creditworthiness).
46. See John Cahir, The Withering Away of Property: The Rise of the Internet Information Commons, 24 OXFORD J. LEGAL STUD. 619, 637-41 (2004) (arguing that the Internet provides a flourishing infor-mation commons)
47. JoAnne Holman & Michael A. McGregor, The Internet as Commons: The Issue of Access, 10 COMM. L. & POL'Y 267, 281-87 (2005) (arguing that the Internet can be seen as a commons).
48. The liability on industry was a substantial factor in the development of tort law. FRIEDMAN, su-pra note 21, at 350-66
49. MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW 1780-1860, at 85-108 (1977)
50. cf. Robert J. Rhee, Tort Arbitrage, 60 FLA. L. REV. 125, 180-81 (2008) (arguing that negligence dominates today because it most preserves industry capital).
51. See infra Part I.A (discussing the fishermen exception).
52. The fishermen cases are the most prominent gray area cases. The physical harms in these cases encompass both harm to private property of third parties and the commons. But other cases also fall into the gray area, and are explained by the theory advanced in this Article. For example, some plaintiffs have an action for economic loss from public nuisance, and these cases can be explained under the theory proposed in this Article. See infra Part III.A
53. see, e.g., Masonite Corp. v. Steede, 23 So. 2d 756, 757-58 (Miss. 1945) (allowing owner of sporting rental and lodging business to recover for economic loss flowing from a public nuisance).
54. FRANK H. KNIGHT, RISK, UNCERTAINTY AND PROFIT 19-20, 232 (Dover ed. 2006) (1921)
55. see infra Part III.B.
56. People Express Airlines, Inc. v. Consol. Rail Corp., 495 A.2d 107, 109 (N.J. 1985) ("It is well-accepted that a defendant who negligently injures a plaintiff or his property may be liable for all prox-imately caused harm, including economic losses.").
57. See, e.g., Ultramares Corp. v. Touche, 174 N.E. 441, 448 (N.Y. 1931) (Cardozo, C.J.) (holding that accountant has no duty to creditors for negligent misrepresentation of company's financial state-ments).
58. See, e.g., Biakanja v. Irving, 320 P.2d 16, 19 (Cal. 1958) (holding that a notary public has a duty when drafting a will to intended beneficiaries of will)
59. Glanzer v. Shepard, 135 N.E. 275, 277 (N.Y. 1922) (Cardozo, J.) (holding that a public weigher had a duty to the purchaser of beans when defendant was hired specifically to execute the transaction).
60. See, e.g., Seely v. White Motor Co., 403 P.2d 145, 147-48 (Cal. 1965) (holding that a plaintiff can recover lost profit under a breach of express warranty claim).
61. See, e.g., In re Kinsman Transit Co., 388 F.2d 821, 825 (2d Cir. 1968) (holding that when a ship crashed into a bridge the defendant was not liable for lost profit of plaintiff who suffered no physical harm)
62. Neb. Innkeepers, Inc. v. Pittsburgh-Des Moines Corp., 345 N.W.2d 124, 126-27 (Iowa 1984) (holding that defendant was not liable for economic loss to local businesses resulting from damaged bridge)
63. Rickards v. Sun Oil Co., 41 A.2d 267, 269-70 (N.J. 1945) (holding that the lost profits of local businesses were not proximately caused by the defendant's negligence that collapsed a bridge providing the only ingress and egress from island).
64. Scholars have provided more comprehensive taxonomies. See BRUCE P. FELDTHUSEN, ECONOMIC NEGLIGENCE: THE RECOVERY OF PURE ECONOMIC LOSS 1-3 (2d ed. 1989) (discussing vari-ous taxonomies)
65. Anita Bernstein, Keep It Simple: An Explanation of the Rule of No Recovery for Pure Economic Loss, 48 ARIZ. L. REV. 773, 782-83 (2006) (same)
66. Perry, Relational Economic Loss, supra note 10, at 713 (same).
67. See, e.g., Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 251
68. Perry, Rela-tional Economic Loss, supra note 10, at 714
69. Robert L. Rabin, Respecting Boundaries and the Economic Loss Rule in Tort, 48 ARIZ. L. REV. 857, 859 (2006)
70. Gary T. Schwartz, Economic Loss in American Tort Law: The Examples of J'Aire and of Products Liability, 23 SAN DIEGO L. REV. 37, 38 (1986)
71. Stapleton, supra note 11, at 534-35.
72. See Stapleton, supra note 11, at 561 ("U.S. case law on economic loss is still treated as falling in-to disparate fact-dictated pockets of liability.")
73. see also Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 251 (arguing that Robins "does not necessarily provide much of an insight into the myriad other problems classified under the heading of 'economic loss'").
74. 275 U.S. 303 (1927).
75. Id. at 307. The difference between the contract price and the market price of the charter was $32,550.
76. Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 252.
77. Robins, 275 U.S. at 307.
78. Id. at 309-10.
79. Id. at 308-09 (citations omitted).
80. See Perry, Relational Economic Loss, supra note 10, at 725 (citing cases).
81. Id. at 725-26
82. see, e.g., Burgess v. M/V Tamano, 370 F. Supp. 247, 250 n.2 (S.D. Me. 1973). Robins was technically an admiralty case, but its influence on the common law is unquestionable.
83. See Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 249 n.3.
84. See, e.g., J'Aire Corp. v. Gregory, 598 P.2d 60, 63-64 (Cal. 1979) (upholding lost profit claim of a lessee restaurant against a contractor for negligent delays in its remodeling of a local airport).
85. But see Rabin, supra note 14, at 1514 n.3 (criticizing J'Aire as "strained" reasoning)
86. Schwartz, supra note 35, at 40 (arguing that J'Aire was wrongly decided).
87. 495 A.2d 107 (N.J. 1985).
88. Id. at 109.
89. Id. at 116.
90. Rabin, supra note 35, at 858.
91. It appears that only the Alaska Supreme Court has followed People Express and allowed recovery for pure economic loss.
92. See Mattingly v. Sheldon Jackson Coll., 743 P.2d 356, 359-61 (Alaska 1987).
93. See Bernstein, supra note 34, at 791 ("The bulk of economic-loss case law repudiates People Ex-press and J'Aire.")
94. Rabin, supra note 35, at 858 ("People Express. stands as a lonely outpost.").
95. See Louisiana ex rel. Guste v. M/V Testbank, 752 F.2d 1019, 1023 (5th Cir. 1985) (en banc) ("Retention of this conspicuous bright-line rule. is strong testament both to the rule's utility and to the absence of a more 'conceptually pure' substitute." (citations omitted)).
96. See RICHARD A. EPSTEIN, TORTS 610 (1999)
97. WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT LAW 251-52 (1987)
98. Bishop, supra note 15, at 25-26
99. Victor P. Goldberg, Recovery for Economic Loss Following the Exxon Valdez Oil Spill, 23 J. LEGAL STUD. 1, 4-7 (1994) [hereinafter Goldberg, Exxon Valdez]
100. Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 271-72
101. Perry, Relational Economic Loss, supra note 10, at 716 n.16
102. Rabin, supra note 14, at 1535 n.72
103. Rabin, supra note 16, at 298-99
104. Stapleton, supra note 11, at 567-70. Casebooks also frequently acknowledge the fishermen exception.
105. See, e.g., WARD FARNSWORTH & MARK F. GRADY, TORTS: CASES AND QUESTIONS 279-80 (2004)
106. TWERSKI & HENDERSON, supra note 19, at 356.
107. See, e.g., M/V Testbank, 752 F.2d at 1027 n.10
108. id. at 1034 (Williams, J., concurring).
109. Defen-dants seem to readily concede the question of liability. Pruitt v. Allied Chem. Corp., 523 F. Supp. 975, 978 (E.D. Va. 1981).
110. The Fifth Circuit's reservation of the issue concerning fishermen's right to recover lost catch in M/V Testbank will prove to be important. On April 20, 2010, Deepwater Horizon, an off-shore oil rig operated by BP plc, exploded and thereafter continuously spilled oil into the Gulf of Mex-ico. As of the final editing of this Article by the author, July 12, 2010, the leak has not been contained. This disaster is probably the worst oil spill affecting the United States, and when the final assessment is made the catastrophe will most probably far exceed the Exxon Valdez in environmental harm and liabili-ty. On June 16, 2010, following a meeting with President Barack Obama, BP announced a commitment of $20 billion toward a compensation fund. Press Release, BP, BP Establishes $20 Billion Claims Fund for Deepwater Horizon Spill and Outlines Dividend Decisions, (June 16, 2010), available at http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=706 2966.
111. Fishermen in the ju-risdictions covered by the Fifth and Eleventh Circuits, states abutting the Gulf of Mexico, will surely claim their share of compensation from the fund. See infra notes 67-70 and accompanying text (discuss-ing the law in the Eleventh Circuit).
112. In re Exxon Valdez, 270 F.3d 1215, 1225 (9th Cir. 2001) (awarding fishermen $287 million in prospective catch with additional $5 billion in punitive damages). After the Exxon Valdez oil spill, Congress regulated the liability of oil spills for vessels and facilities. A federal statute recognizes "[d]amages for loss of subsistence use of natural resources, which shall be recoverable by any claimant who so uses natural resources which have been injured, destroyed, or lost, without regard to the owner-ship or management of the resources." 33 U.S.C. § 2702(b)(2)(C) (2006) (emphasis added). This pro-vision obviously covers fishermen's rights to lost catch.
113. See supra note 9 & infra note 280 and accompanying text.
114. See EPSTEIN, supra note 51, at 610 ("[I]t is uncertain as to whether [fishermen] are the recipients of an ad hoc privilege, or simply only [an] illustration of a general principle.").
115. See infra notes 140-142 and accompanying text.
116. The following case law focuses on federal cases. But the protection of fishermen's prospective profit absent an accompanying harm to their property or person is not limited to federal cases. State cases based on negligence and nuisance claims have also held for fishermen. See, e.g., Masonite Corp. v. Steede, 23 So. 2d 756 (Miss. 1945) (en banc)
117. Hampton v. N.C. Pulp Co., 27 S.E.2d 538 (N.C. 1943)
118. Columbia River Fishermen's Protective Union v. City of St. Helens, 87 P.2d 195 (Or. 1939)
119. Morris v. Graham, 47 P. 752 (Wash. 1897).
120. 209 F.2d 178, 179 (9th Cir. 1953).
121. Id. at 179-80 (citing cases).
122. In an earlier decision, the Ninth Circuit had invoked Robins to deny lost profit claims of fishermen. See Borcich v. Ancich, 191 F.2d 392, 396-97 (9th Cir. 1951). But the Carbone court overruled the prior precedent. 209 F.2d at 183.
123. Carbone, 209 F.2d at 182.
124. 501 F.2d 558, 559-60 (9th Cir. 1974).
125. Id. at 570.
126. 733 F.2d 813, 815 (11th Cir. 1984).
127. Id. at 820.
128. There is some doubt whether Miller Industries is still good law in light of East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986).
129. See Mem'l Hermann Healthcare Sys. Inc. v. Eurocopter Deutschland, GMBH, 524 F.3d 676, 679 n.2 (5th Cir. 2008) ("Miller is also seemingly no longer good law.").
130. In East River, the Supreme Court held that a manufacturer has no duty under tort law to prevent a product from injuring itself. 476 U.S. at 871. The Court did not reach the issue of whether admiralty law would recognize a tort claim for lost profit. Id. at 871 n.6. The Court stated that manufacturers cannot be held liable for "all foreseeable claims for purely economic loss." Id. at 874 (citing Robins Dry Dock & Repair Co. v. Flint, 275 U.S 303, 309 (1927)). This is the general rule, but the Court did not address whether the manufacturer has a tort duty to third parties. Such tort duty would not be derivative of the contract claim. Accordingly, the rule regarding fishermen in Miller Industries may still be good law in the Eleventh Circuit.
131. 131 F.3d 389, 390 (4th Cir. 1997).
132. Henderson v. Arundel Corp., 262 F. Supp. 152, (D. Md. 1966), aff'd 384 F.2d 998 (4th Cir. 1967).
133. Yarmouth Sea Products, Ltd., 131 F.3d at 398.
134. Union Oil Co. v. Oppen, 501 F.2d 558, 563 (9th Cir. 1974)
135. see supra note 43
136. infra Part III.A.
137. This reasoning has been called "bizarre." Stapleton, supra note 11, at 567.
138. The following authors'dialogue between Aaron Twerski and James Henderson in their casebook illustrates perhaps in an amusing way the essential problem:
139. Aaron: But what if he had burned me out-he would have to pay me lost profits then, wouldn't he?
140. Jim: Not exactly. He would have to pay you the value of the Deli he destroyed, part of which would reflect its capacity to earn profits. But then, he destroyed your "property," after all. Maybe that's another way of explaining the "no recovery" rule for pure economic loss-you don't have a property interest in the expectation of future profits, apart from your property interest in the Deli, itself.
141. Aaron: Then why do fishermen recover when fishing grounds are damaged? They don't own the fish 'til they catch them.
142. Jim: They have a "quasi-property interest" in the fish, I suppose. Same with the airline in People Express-they had a "quasi-property interest" in the operation of their terminal facility.
143. Aaron: And you, my friend, are left with a "quasi-theory." To get Judge Henderson's attention, all I have to do is assert a "quasi-property interest" in the uninterrupted operation of my Deli. I didn't realize until this moment how susceptible to legal fictions you are.
144. TWERSKI & HENDERSON, supra note 19, at 365.
145. See, e.g., 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 750 N.E.2d 1097 (N.Y. 2001) (denying recovery for owner of a delicatessen who suffered economic loss when a nearby build-ing collapse closed the street).
146. James, supra note 5, at 48
147. see Louisiana ex rel. Guste v. M/V Testbank, 752 F.2d 1019, 1028-29 (5th Cir. 1985) (en banc) (considering "pragmatic" limitations)
148. Stephen R. Perry, Protected Interests and Undertakings in the Law of Negligence, 42 U. TORONTO L.J. 247, 262 (1992) [hereinafter Perry, Protected Interests] (observing that the standard explanation "is pragmatic in character").
149. See infra notes 97-106 (discussing the theories of William Bishop and Mario Rizzo).
150. PETER CANE, TORT LAW AND ECONOMIC INTERESTS 132 (1991).
151. Atiyah, supra note 4, at 270. See, e.g., Libbey v. Hampton Water Works Co., 389 A.2d 434, 435 (N.H. 1978) (imposing liability on water company for negligent act would create "indefinitely extended scope of liability").
152. Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50, 54 (1st Cir. 1985) (Breyer, J.).
153. Rabin, supra note 14, at 1531-32.
154. See M/V Testbank, 752 F.2d at 1021 ("[W]ithout this limitation foreseeability loses much of its ability to function as a rule of law.").
155. Rabin, supra note 14, at 1526 ("Foreseeability proves too much, as has been frequently demonstrated.").
156. See In re Kinsman Transit Co., 388 F.2d 821, 825 n.8 (2d Cir. 1968).
157. Ultramares Corp. v. Touche, 174 N.E. 441, 444 (N.Y. 1931).
158. See Robert J. Rhee, A Principled Solution for Negligent Infliction of Emotional Distress Claims, 36 ARIZ. ST. L.J. 805, 836-42 (2004) (arguing that foreseeability is insufficient to invoke duty in emo-tional distress cases).
159. See William L. Prosser, Palsgraf Revisited, 52 MICH. L. REV. 1, 15 (1953) ("These are shifting sands, and no fit foundation. There is a duty if the court says there is a duty.").
160. Louisiana ex rel. Guste v. M/V Testbank, 752 F.2d 1019, 1029 (5th Cir. 1985) (en banc).
161. Rabin, supra note 14, at 1534.
162. Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50, 54 (1st Cir. 1985) (Breyer, J.).
163. Id. at 54-55.
164. see Rabin, supra note 35, at 862 (stating that courts must sort out an "exceedingly fine and elaborate network of interdependencies").
165. M/V Testbank, 752 F.2d at 1028-29.
166. Richard A. Posner, Common-Law Economic Torts: An Economic and Legal Analysis, 48 ARIZ. L. REV. 735, 737 (2006).
167. See EPSTEIN, supra note 51, at 606.
168. LANDES & POSNER, supra note 51, at 251-55 & n.48.
169. Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 267 n.75.
170. Goldberg, Exxon Valdez, su-pra note 51, at 11-14 & n.49.
171. Perry, Economic Bias, supra note 3, at 1588-96, 1601-04.
172. Perry, Relational Economic Loss, supra note 10, at 733-38, 774-77.
173. Rabin, supra note 14, at 1535-36 n.72. Bishop's and Rizzo's ideas are widely taught to law students.
174. See RICHARD A. EPSTEIN, CASES AND MATERIALS ON TORTS 1266 (9th ed. 2008).
175. TWERSKI & HENDERSON, supra note 19, at 359 n.25.
176. Bishop, supra note 15, at 4.
177. Id. at 11.
178. Bishop clarifies that many of his assumptions are "an empirical question" and that "financial losses are only poorly correlated with social cost."
179. W. Bishop, Economic Loss: A Reply to Professor Rizzo, 2 OXFORD J. LEGAL STUD. 207, 207 (1982).
180. Bishop, supra note 15, at 11.
181. Id. at 13.
182. Id. at 17.
183. Rizzo, supra note 16, at 282.
184. Id. at 283.
185. Rizzo was not the first to argue that the rule channels claims into physical loss claims.
186. See Atiyah, supra note 4, at 274 ("[T]he law should try to channel all the claims through the person who has suffered the physical damage."). Atiyah, however, concludes that such "channeling" would be unsatis-factory and arbitrary.
187. See Rhee, supra note 88, at 836-42 (discussing the instrumental problems surrounding emotion-al distress claims).
188. See Union Oil Co. v. Oppen, 501 F.2d 558, 568-69 (9th Cir. 1974)
189. Rabin, supra note 14, at 1522-25
190. Eileen Silverstein, On Recovery in Tort for Pure Economic Loss, 32 U. MICH. J.L. REFORM 403, 419 (1999).
191. Compare People Express Airlines, Inc. v. Consol. Rail. Corp., 495 A.2d 107, 110 (N.J. 1985) (pure economic loss case) ("These concerns include the fear of fraudulent claims, mass litigation, and limitless liability, or liability out of proportion to the defendant's fault."), with Gottshall v. Consol. Rail Corp., 988 F.2d 355, 366 (3d Cir. 1993), rev'd by Consol. Rail Corp. v. Gottshall, 512 U.S. 530 (1994) (emotional distress case) ("[W]e adopted the policy considerations. [those being] a need to prevent incalculable and potentially unlimited damages, a flood of litigation, and fraud.").
192. See supra note 1 and infra note 110.
193. Rhee, supra note 88, at 813
194. see, e.g., Lynch v. Knight, (1861) 11 Eng. Rep. 854, 863 (H.L.).
195. See Rhee, supra note 88, at 816-23 (describing various rules and jurisdictional dispersion of rules).
196. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 36 (1991).
197. See Atiyah, supra note 4, at 262-64 (discussing this distinction)
198. see also Rhee, supra note 88, at 859-60 (discussing cases in emotional distress claims using this distinction).
199. See, e.g., Haft v. Lone Palm Hotel, 478 P.2d 465, 475 (Cal. 1970) (shifting burden of proof on the issue of causation to defendants in negligence action when requiring plaintiff to prove proximate causation would advantage the defendant)
200. Byrne v. Boadle, (1863) 159 Eng. Rep. 299, 300 (Exch. Div.) (officially instituting the doctrine of res ipsa loquitur when breach is obvious but impossible to prove)
201. see also Robert J. Rhee, Probability, Policy, and the Problem of Reference Class, 11 INT'L J. EVIDENCE & PROOF 286, 290-91 (2007) (discussing the problem of systemic error in tort law and the law's "nor-mative correction" of this problem through special doctrines).
202. See Robert J. Rhee, Toward Procedural Optionality: Private Ordering of Public Adjudication, 84 N.Y.U. L. REV. 514, 561 (2009).
203. See OHIO REV. CODE ANN. § 2307.80(A)
204. Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 19 (1991)
205. James v. Horace Mann Ins. Co., 638 S.E.2d 667, 672 (S.C. 2006).
206. See 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 750 N.E.2d 1097, 1103 (N.Y. 2001).
207. See id. ("Policy-driven line-drawing is to an extent arbitrary because, wherever the line is drawn, invariably it cuts off liability to persons who foreseeably might be plaintiffs.").
208. See Rhee, supra note 88, at 806-07.
209. Silverstein, supra note 108, at 429.
210. See generally G. EDWARD WHITE, TORT LAW IN AMERICA: AN INTELLECTUAL HISTORY (ex-panded ed. 2003) (examining the shifting and varied ideas underpinning tort law as developed over time).
211. Perry, Protected Interests, supra note 80, at 263.
212. 750 N.E.2d 1097, 1100 (N.Y. 2001).
213. Bishop, supra note 15, at 5-11.
214. 41 A.2d 267 (N.J. 1945). This fact pattern of access cutoff occurs in other cases as well.
215. See supra note 33.
216. Cf. Weller & Co. v. Foot & Mouth Disease Research Inst., (1966) 1 Q.B. 569, 570 (refusing economic loss recovery for cattle auctioneer for losses caused by virus escape from research institute).
217. Bishop, supra note 15, at 13.
218. 750 N.E.2d at 1099.
219. Bishop's theory has been roundly criticized by others.
220. See Schwartz, supra note 12, at 128
221. Rabin, supra note 14, at 1536 n.72
222. Mario J. Rizzo, The Economic Loss Problem: A Comment on Bishop, 2 OXFORD J. LEGAL STUD. 197 (1982)
223. see also Perry, Relational Economic Loss, supra note 10, at 738-45 (summarizing the criticisms).
224. But see LANDES & POSNER, supra note 51, at 252-53 (rebutting Ra-bin's critique of Bishop's theory).
225. Rizzo, A Theory of Economic Loss, supra note 16, at 296-97.
226. Id. at 298.
227. Id. at 301.
228. Like Bishop's theory, Rizzo's theory has been criticized.
229. See Rabin, supra note 14, at 1535 n.72
230. see also Relational Economic Loss, supra note 10, at 777-81 (summarizing criti-cisms).
231. These cases are frequently cited in scholarship and casebooks.
232. See, e.g., FARNSWORTH & GRADY, supra note 51, at 281-82
233. LANDES & POSNER, supra note 51, at 251-54
234. Perry, Relational Economic Loss, supra note 10 at 725, 779
235. Perry, supra note 14, at 1528 n.47, 1535 n.72
236. Rizzo, supra note 16, at 301.
237. See, e.g., Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 309 (1927) (stating that "no au-thority need be cited" to justify the pure economic loss rule).
238. To keep this condition somewhat realistic at least, we assume that there is not perfect informa-tion as to all other factors of outcome, such as judicial outcomes.
239. The pricing of insurance premiums is instructive. The premium is calculated as: P = E(S) + k + R, where E(S) represents the mathematical expectation of claims, k is the operating expenses, and R is a risk premium that allows for unforeseen deviations in the claims amount.
240. ERIC BRIYS & FRANÇOIS DE VARENNE, INSURANCE FROM UNDERWRITING TO DERIVATIVES: ASSET LIABILITY MANAGEMENT IN INSURANCE COMPANIES 6 (2001).
241. 501 F.2d 558 (9th Cir. 1974)
242. see supra text accompanying note 63.
243. Cf. Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50, 54-55 (1st Cir. 1985) (Breyer, J.) (ar-guing that contractual risk allocation may be more efficient)
244. EVRA Corp. v. Swiss Bank Corp., 673 F.2d 951, 957-59 (7th Cir. 1982) (Posner, J.) (arguing that the plaintiff was in a better position to measure the risk and take precautions against economic loss)
245. see Miles, supra note 19 (analyzing Posn-er's opinion in Swiss Bank).
246. See generally Robert J. Rhee, The Effect of Risk on Legal Valuation, 78 U. COLO. L. REV. 193 (2007) (discussing effect of uncertainty on valuation)
247. Robert J. Rhee, A Price Theory of Legal Bargain-ing: An Inquiry into the Selection of Settlement and Litigation Under Uncertainty, 56 EMORY L.J. 619 (2006) (discussing information asymmetry and related risk premiums).
248. See Perry, Economic Bias, supra note 3, at 1616 (doctrine is "irrelevant")
249. Rabin, supra note 14, at 1535 n.72 (Union Oil Co. v. Oppen holds "no general interest").
250. See TWERSKI & HENDERSON, supra note 19, at 365 (fishermen have "quasi-property interest" in the bounties of the sea)
251. Denise Antolini, Modernizing Public Nuisance: Solving the Paradox of the Spe-cial Injury Rule, 28 ECOLOGY L.Q. 755, 773 n.65 (2001) (preclusion would result in "unfairness")
252. Richard A. Epstein, Too Pragmatic by Half, 109 YALE L.J. 1639, 1654 (2000) ("[C]onvenience favors allowing actions by immediate parties with large stakes, such as fishermen.")
253. Stapleton, supra note 11, at 568 (fishermen had a "reasonably foreseeable, special connection" to the sea).
254. See Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 273 ("The case for compensating the future losses [of fishermen] is much weaker.").
255. Rizzo, supra note 16, at 298-99.
256. Bishop, supra note 15, at 25-26 (citing Union Oil Co. v. Oppen, 501 F.2d 558 (9th Cir. 1974))
257. see also LANDES & POSNER, supra note 51, at 251-52 (agreeing with Bishop's theory).
258. LANDES & POSNER, supra note 51, at 252.
259. Id. at 252 n.50
260. see also Pruitt v. Allied Chem. Corp., 523 F. Supp. 975, 978 (D. Va. 1981) ("Presumably, sportsfishermen share the same entitlement to legal redress for damage to the Bay's ecol-ogy.").
261. Bishop, supra note 15, at 25-26.
262. See generally Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. 347 (1967) (exploring different types of property ownership rights, including communal ownership).
263. Bishop, supra note 15, at 25-26.
264. See, e.g., In re Exxon Valdez, 270 F.3d 1215, 1223, 1225 (9th Cir. 2001) (Exxon spent over $2 billion in cleanup of Prince William Sound, settled $900 million with Alaska and the United States to restore the environment, and was fined $125 million)
265. 33 U.S.C. § 2702(a) (2006) (providing liability for "removal costs" incurred in an oil spill).
266. The government as plaintiff is a familiar concept. See, e.g., United States v. Bestfoods, 524 U.S. 51, 57-58 (1998) (action against defendant for environmental cleanup under CERCLA).
267. But see Exxon Valdez, 270 F.3d at 1221 ("This is a case about commercial fishing. The ver-dict in this case was for damage to economic expectations for commercial fishermen.").
268. See Bishop, supra note 15, at 13 ("But what exactly is the social cost of an accident is a very complex matter. The answer depends upon innumerable particular facts of interacting markets.").
269. Schwartz, supra note 12, at 128.
270. Perry, Protected Interests, supra note 80, at 263, 266 ("The so-called pragmatic con-cerns. [are] just the surface symptoms of an underlying concern along these lines.").
271. See Palsgraf v. Long Island R. Co., 162 N.E. 99, 99 (N.Y. 1928) ("Proof of negligence in the air, so to speak, will not do." (quoting SIR FREDERICK POLLOCK, TORTS 455 (11th ed. 1920)) (internal quo-tation marks omitted)).
272. See R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 2 (1960).
273. But see Andrew W. McThenia & Joseph E. Ulrich, A Return to Principles of Corrective Justice in Deciding Economic Loss Cases, 69 VA. L. REV. 1517 (1983).
274. FRANK J. FABOZZI & FRANCO MODIGLIANI, CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS 455 (4th ed. 2009)
275. see also ASWATH DAMODARAN, CORPORATE FINANCE: THEORY AND PRACTICE 155 (2d ed. 2001)
276. SCOTT E. HARRINGTON & GREGORY R. NIEHAUS, RISK MANAGEMENT AND INSURANCE 4 (2d ed. 2004) ("[B]usiness risk management is concerned with possible reductions in business value from any source.").
277. FABOZZI & MODIGLIANI, supra note 159, at 455.
278. See G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 903 (9th Cir. 1992).
279. See Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979)
280. Thomas W. Merrill, Property and the Right to Exclude, 77 NEB. L. REV. 730, 730 (1998).
281. Knight notes that ownership "consists essential-ly of the combination of the rights of control and of usufruct." KNIGHT, supra note 28, at 352. Stephen Perry argues that the distinction between pure and consequential economic loss is not arbitrary because the harm invoked by the consequential economic loss cases "is the loss of use of the property." Perry, Protected Interests, supra note 80, at 269. The loss of use of property, however, cannot be the distinc-tion as this would entail contractual rights seen in Robins.
282. See infra note 179 and accompanying text.
283. See R.H. Coase, The Nature of the Firm, 4 ECONOMICA 386, 390-91 (1937).
284. 370 F. Supp. 247, 248-49 (D. Me. 1973).
285. Id. at 249-50.
286. Id. at 250
287. (citing, among others, William L. Prosser, Private Action for Public Nuisance, 52 VA. L. REV. 997, 1004-11 (1966)).
288. Id. at 250-51.
289. Id. at 251.
290. (quoting WILLIAM L. PROSSER, LAW OF TORTS, § 88, at 591 (4th ed. 1971)).
291. Other cases have recognized a fishermen's "special interest" in the public right to fishing and thus their right to recover economic loss. See, e.g., Columbia River Fishermen's Protective Union v. City of St. Helens, 87 P.2d 195, 197 (Or. 1939).
292. 172 23 So. 2d 756 (Miss. 1945).
293. Id. at 758. The point here is that the "fishermen" exception is not an exception for a special oc-cupational class but is a part of a class of cases with a common principle. The fishermen cases are prominent because these cases most commonly present the fact pattern that invokes the principle.
294. Id. at 757-58.
295. Id. at 758.
296. See R.H. Coase, The Nature of the Firm, supra note 164, at 390-91.
297. This concept is the basis of the prevailing economic theory of the firm, which views the firm as a nexus of contracts among persons owning inputs of production.
298. see also EASTERBROOK & FISCHEL, supra note 112, at 12
299. Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 311 (1976).
300. See KNIGHT, supra note 28, at 306 (residual income belongs to the owner of property as property rent).
301. "The theory of the income capitalization approach is based on the premise that value is equal to the present value of the cash flow and reversionary value the property will produce over a reasonable holding (ownership) period."
302. JAMES R. HITCHNER, FINANCIAL VALUATION: APPLICATIONS AND MODELS 352 (2d ed. 2006). This method is the primary value indicator for commercial assets.
303. The suggestion is not that the actual market is perfectly competitive, but simply that contract spreads on rentals, like other arbitrage opportunities, are hard to find.
304. Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 252. The parties agreed to a rent of £250 per month. Id. This price was well below the market price. Id. The plaintiff chartered the ship in 1915 for twenty-six months at a rate of £11,200 per month, and the ship was rechartered to another party for nearly £16,995 per month for a sixteen-month term beginning on August 1, 1917.
305. KNIGHT, supra note 28, at 281-82, 311.
306. Market participants are not helpless in the face of fortune's winds. The charterer could have taken a number of steps to hedge this risk: for example, entering into forward contracts with subcharter-ers to lock in prices, or, less likely, a derivative type wager on the forward prices of shipping contracts. Such contracts have existed for centuries.
307. See ARISTOTLE, POLITICS, bk. I, ch. 11, reprinted in THE BASIC WORKS OF ARISTOTLE 1142 (Richard McKeon ed. 2001) (describing the use of option contracts in the olive oil market). Alternatively, if war was the principal driver of price, the charterer could have entered into a wager on war's end or continuance, which would have imperfectly hedged the risk of an adverse future price movement. These steps would not secure prospective profit because such hedging is always associated with a cost. There is not only the obvious transaction cost associated with hedging, but also we cannot ignore the fundamental nature of the transaction, namely, the charterer must assume an adverse economic consequence of a forward rate swap if the rates increase.
308. 275 U.S. 303, 308 (1927) ("Their loss arose only through their contract with the owners.").
309. KNIGHT, supra note 28, at 224-25.
310. Id. at 19-20, 232.
311. This classic treatise has been called "the first work of any importance, and in any field of study, that deals explicitly with decision-making under conditions of uncertainty."
312. PETER L. BERNSTEIN, AGAINST THE GODS: THE REMARKABLE STORY OF RISK 219 (1996).
313. Knight's theory remains a vital subject of academic inquiry.
314. See Richard N. Langlois & Metin M. Cosgel, Frank Knight on Risk, Un-certainty, and the Firm: A New Interpretation, 31 ECON. INQUIRY 456 (1993)
315. Stephen F. LeRoy & Larry D. Singell, Jr., Knight on Risk and Uncertainty, 95 J. POL. ECON. 394 (1987)
316. J. Fred Weston, The Profit Concept and Theory: A Restatement, 62 J. POL. ECON. 152 (1954).
317. KNIGHT, supra note 28, at 348
318. see also Fischer Black, Noise, 41 J. FIN. 529, 530 (1986) (posit-ing that a stock market is impossible without uncertainty).
319. Harry Markowitz, Portfolio Selection, 7 J. FIN. 77, 77 (1952).
320. KNIGHT, supra note 28, at 238, 308-09, 311.
321. Even supposedly risk-neutral corporations buy in-surance.
322. Rhee, supra note 25, at 153
323. see also HARRINGTON & NIEHAUS, supra note 159, at 171-74 (explaining why corporations purchase insurance)
324. J.B. Heaton, Settlement Pressure, 25 INT'L REV. L. & ECON. 264, 272 (2005).
325. KNIGHT, supra note 28, at 285 ("The presence of true profit, therefore, depends on an absolute uncertainty in the estimation of the value of judgment, or on the absence of the requisite organization for combining a sufficient number of instances to secure certainty through consolidation."). Knight defines standard business usage of profit as "the entrepreneur's net income, what remains out of the gross proceeds of the business after paying the hired labor and capital at the agreed rates, determined by mar-ket competition."
326. Frank H. Knight, Profit and Entrepreneurial Functions, 2 J. ECON. HIST. 126, 127 (Supp. 1942)
327. see also KNIGHT, supra note 28, at 280, 284 (defining profit as the residual income after the payment to all factors of production). Knight distinguishes this general understanding of profit from "pure profit," which also deducts the "going rate" wages of the entrepreneur were he to rent his labor. Knight, Profit and Entrepreneurial Functions, supra, at 127.
328. KNIGHT, supra note 28, at 284.
329. See supra notes 181~183.
330. Knight commented that entrepreneurs have "an irrationally high confidence in their own good fortune."
331. KNIGHT, supra note 28, at 366.
332. Adam Smith similarly observed that overconfidence "is an ancient evil."
333. ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 124 (Edwin Cannan ed. 1994) (1776).
334. As a result of this overconfidence, Knight believes that "busi-ness as a whole suffers a loss."
335. KNIGHT, supra note 28, at 365.
336. KNIGHT, supra note 28, at 78, 86.
337. Id. at 82.
338. See Knight, supra note 191, at 127 ("[I]t will be evident to anyone with a rudimentary under-standing of economic processes and analysis that profit (always in the sense of pure profit) would be ab-sent under the conditions of equilibrium with perfect competition'.").
339. See supra notes 185-186 and accompanying text.
340. KNIGHT, supra note 28, at 231.
341. Id. at 199, 259.
342. Id. at 237-38.
343. Markowitz, supra note 189, at 91
344. see also KNIGHT, supra note 28, at 347 (calling uncertainty "evil").
345. See HARRINGTON & NIEHAUS, supra note 159, at 179-87, 195
346. EMMETT J. VAUGHAN & THERESE M. VAUGHAN, FUNDAMENTALS OF RISK AND INSURANCE 41-42, 161 (9th ed. 2003).
347. Telephone interview with Barry Bablin, Senior Vice President, Cas. & Actuarial Servs., Farm Family Cas. Ins. Co. (Feb. 17, 2009). Bablin suggested that a policy for business interruption for a cov-ered loss of another person's property is not prevalent. Such risks are difficult to price and premiums would not be price effective for policyholders. If such a market for pure economic loss exists, he sug-gested that it would be found in the specialized excess and surplus lines. Accord Telephone interview with Steven Sachs, Managing Dir., Nat'l Real Estate Practice, Hilb Rogal & Hobbs (Feb. 10, 2009) (confirming broadly Bablin's points).
348. See Ellen S. Pryor, The Economic Loss Rule and Liability Insurance, 48 ARIZ. L. REV. 905, 912 (2006).
349. VAUGHAN & VAUGHAN, supra note 204, at 41.
350. See supra note 87 and accompanying text.
351. See Pryor, supra note 206, at 908 ("On the supply side, combining coverage for pure economic losses into the same coverage as accidental bodily harm would be difficult.").
352. HARRINGTON & NIEHAUS, supra note 159, at 182
353. see also Robert J. Rhee, Terrorism Risk in a Post-9/11 Economy: The Convergence of Capital Markets, Insurance, and Government Action, 37 ARIZ. ST. L.J. 435, 474-77 (2005) (arguing that economic infeasibility of premium arising from high capital cost is the problem of insuring catastrophic risk).
354. Absent an insurable interest, an insurance contract is void as a wagering contract.
355. LEE R. RUSS & THOMAS F. SEGALLA, 3 COUCH ON INSURANCE § 41:1 (3d ed. 2009).
356. HARRINGTON & NIEHAUS, supra note 159, at 195
357. VAUGHAN & VAUGHAN, supra note 204, at 41, 161.
358. 3 COUCH ON INSURANCE, supra note 212, § 41:11, at 21-22.
359. Id. at 26
360. see also Secura Ins. Co. v. Pioneer State Mut. Ins. Co., 470 N.W.2d 415, 415-16 (Mich. Ct. App. 1991) (leasehold is not an insurable interest).
361. Interestingly, the deli in 532 Madison Avenue achieved a $100,000 settlement for business inter-ruption with its insurer though it did not suffer a physical loss. Interview with Ms. Cho, in her store at 532 Madison Avenue (Feb. 27, 2009) (full name not given). Cho indicated that most other businesses that suffered economic loss did not recover from their insurers.
362. HARRINGTON & NIEHAUS, supra note 159, at 170.
363. The loading cost of insurance is cheaper than the cost of litigation.
364. Rhee, supra note 25, at 159 n.159, 164-65
365. see also Barber Lines A/S v. M/V Do-nau Maru, 764 F.2d 50, 54 (1st Cir. 1985) (Breyer, J.)
366. James, supra note 5, at 52.
367. See Rabin, supra note 14, at 1537 (noting the insurability problem)
368. supra note 205 (describing the absence of a general market for pure economic loss coverage)
369. see also ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW § 3.4(a)(5), at 168-72 (West 1988) (discussing the problem of finding an insurable interest in factual pecuniary expectancies). The economist Robert Shiller notes that insurance removes only a small slice of the potential risks facing most people, and that the most important risks, such as a market decline in home value and the economic value of one's occupation, cannot be insured against or hedged.
370. ROBERT J. SHILLER, THE NEW FINANCIAL ORDER: RISK IN THE 21ST CENTURY 21-45 (2004).
371. See supra note 204 and accompanying text. Economists have argued that Knight's distinction between risk and uncertainty really refers to insurable and uninsurable risk. See, e.g., LeRoy & Singell, supra note 187, at 394.
372. See KNIGHT, supra note 28, at 252-54.
373. See Jensen & Meckling, supra note 177, at 311 ("The private corporation or firm. is also cha-racterized by the existence of divisible residual claims on the assets and cash flows of the organiza-tion.").
374. See Eugene F. Fama & Michael C. Jensen, Agency Problems and Residual Claims, 26 J.L. & ECON. 327, 329 (1983) ("Common stock allows residual risk to be spread across many residual clai-mants who individually choose the extent to which they bear risk and who can diversify across organiza-tions offering such claims.").
375. Residual risk is "the difference between stochastic inflows of resources and promised payments to agents. "
376. Eugene F. Fama & Michael C. Jensen, Separation of Ownership and Control, 26 J.L. & ECON. 301, 302 (1983).
377. See RANDALL S. BILLINGSLEY, UNDERSTANDING ARBITRAGE 8-9 (2005)
378. SERGIO M. FOCARDI & FRANK J. FABOZZI, THE MATHEMATICS OF FINANCIAL MODELING AND INVESTMENT MANAGEMENT 84-85 (2004).
379. This inquiry concerning uncertainty and the law is not limited to tort law. The law is generally biased toward adhering to the principle of no arbitrage in economic transactions. Business risk cannot be eliminated without cost or manipulation. The most obvious adoption of this principle is the law pro-hibiting riskless profit through price fixing and insider trading. See KNIGHT, supra note 28, at 334 (de-scribing problem of managers using inside information). The tentacles of this principle reach further. A transaction between capital creditor and issuer is strictly enforced even though an unforeseen contingen-cy creates a harsh, even unfair, circumstance because the transaction is a party's commitment to a par-ticular view of outcome, which the law does not rearrange per contract doctrine. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1053 (2d Cir. 1982)
380. Metro. Life Ins. Co. v. RJR Na-bisco, Inc., 716 F. Supp. 1504, 1518 (S.D.N.Y. 1989). In corporate affairs, the overwhelming bias is toward respecting the reality that the engagement of enterprise is risky.
381. See Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L. REV. 83, 110-17 (2004).
382. The business judgment rule provides a virtually impenetrable legal shield against liability so long as the manager acted in good faith.
383. Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. REV. 733, 770 (2005)
384. see also Robert J. Rhee, Corporate Ethics, Agency, and the Theory of the Firm, 3 J. BUS. & TECH. L. 309, 320 (2008).
385. Although the stupid, negligent, or unlucky manager can impose great economic havoc on creditors and shareholders, the law prohibits retroactive legal correction of a bad or stupid business decision, no less a fortuitous mishap.
386. See, e.g., In re The Walt Disney Co. Deriv-ative Litig., 906 A.2d 27 (Del. 2006) (finding decision to give poorly performing manager $130 million severance payout protected by business judgment rule)
387. Kamin v. Am. Express Co., 383 N.Y.S.2d 807 (N.Y. Sup. Ct. 1976) (finding decision to distribute stocks and thereby forego approximately $8 million in potential tax savings is protected by business judgment rule).
388. KNIGHT, supra note 28, at 356 (emphasis added).
389. Perry, Economic Bias, supra note 3, at 1609.
390. Id. at 1606.
391. Id. at 1608.
392. Perry adds, "I hesitate to attribute to common-law judges any intention to widen so-cioeconomic gaps." Id. at 1609.
393. Id. at 1607.
394. Id. at 1604.
395. Silverstein, supra note 107, at 431.
396. Id. at 437.
397. Id. at 432.
398. Id. at 437.
399. Perry, Protected Interests, supra note 80, at 266.
400. Id. at 264
401. see also Home Office v. Dorset Yacht Co., Ltd., [1970] A.C. 1004, 1027 (H.L.) (Atkin, L.) ("[F]or one thing it is often caused by deliberate action. Competition involves traders being entitled to damage their rivals'interests by promoting their own.").
402. Perry, Protected Interests, supra note 80, at 266.
403. Id. at 267.
404. Cf. Rhee, supra note 25, at 170-82 (arguing that the dominance of negligence as the standard in accident law is the result of "a compromise within the broader political economy").
405. Based on this theory, it would appear that the New Jersey Supreme Court, the author of People Express, which radically departed from the general rule of Robins, would be the sole dissident and guar-dian of egalitarian sentiments.
406. But see Gary T. Schwartz, Tort Law and the Economy in Nineteenth-Century America: A Reinterpretation, 90 YALE L.J. 1717, 1720 (1981) (observing that even early com-mon law courts displayed an "impressive sternness to major industries and that tort law exhibited a keen concern for victim welfare").
407. MacPherson v. Buick Motor Co., 111 N.E. 1050, 1053 (N.Y. 1916) (Cardozo, J.).
408. Greenman v. Yuba Power Prod., Inc., 377 P.2d 897, 900-01 (Cal. 1963) (Traynor, J.).
409. Sindell v. Abbott Labs., 607 P.2d 924, 936-38 (Cal. 1960).
410. "[N]egligently harming another is morally less reprehensible than doing so intentionally, and economic interests are not generally protected against intentional interference." Perry, Protected Inter-ests, supra note 80, at 265.
411. See Palsgraf v. Long Island R.R. Co., 162 N.E. 99, 101 (N.Y. 1928).
412. Perry, Protected Interests, supra note 80, at 266.
413. This comment should not be construed as a complete explanation for why tort law provides compensation for physical losses. That inquiry is beyond the scope of this Article. The point is simply that the most obvious factors of production are property and human capital.
414. An element of insurability is the absence or mitigation of a moral hazard.
415. Rhee, supra note 25, at 159 n.159, 164-65
416. see also Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50, 54 (1st Cir. 1985) (Breyer, J.).
417. KNIGHT, supra note 28, at 235.
418. See Atiyah, supra note 4, at 271-73 (discussing the problem of large scale wealth transfers if the law eliminates the rule of no recovery for pure economic loss).
419. See Barber Lines, 764 F.2d at 55 (noting "inaccessibility of the empirical information needed to confirm or invalidate" the policy considerations).
420. Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 309 (1927).
421. Although it is not within the scope of this Article to engage in comparative analyses of econo-mies and rules of law, we can speculate, consistent with the thesis here, that societies with weaker com-mitment to private arrangement of the economic organization would show a greater tendency to recognize pure economic loss as a viable cause of action. In this regard, the observation that civil law jurisdictions such as France may be more accommodating of these claims than Anglo-American juris-dictions is consistent with this speculation.
422. See Perry, Economic Bias, supra note 3, at 1617-20
423. see also Perry, Relational Economic Loss, supra note 10, at 729 ("It would be fair to say that the prospects of liability for relational loss are higher in France than in England.").
424. Perry, Economic Bias, supra note 3, at 1607-09.
425. KNIGHT, supra note 28, at 299.
426. The suggestion is not that wealth is a superior value to some other value such as welfare. The author punts this complex discourse to philosophers and economists.
427. Compare Ronald M. Dworkin, Is Wealth a Value?, 9 J. LEGAL STUD. 191 (1980) (arguing wealth maximization fails as a normative theory of social good).
428. and Anthony T. Kronman, Wealth Maximization as a Normative Principle, 9 J. LEGAL. STUD. 227 (1980) (arguing wealth maximization combines the problems of both utilitarianism and Pareto superiority).
429. with Richard A. Posner, The Value of Wealth: A Comment on Dworkin and Kronman, 9 J. LEGAL STUD. 243 (1980) (defending the normative usefulness of wealth maximization).
430. Consider for example the following passage from a public nuisance case involving fishermen's right to recover lost profit:
431. We do not think this is merely to prevent the common shame of the extinction of an interesting type of river fauna in our time, or for the sole benefit of the owners of exclusive fisheries. In fact, perhaps the largest beneficiaries of these laws are those engaged in the business of fishing in common fisheries. The great fisheries on the Columbia River and of Alaska so conducted are so extensive that their products are found at one time or another on every table in the country.
432. Hampton v. N.C. Pulp Co., 27 S.E. 538, 546 (N.C. 1943).
433. KNIGHT, supra note 28, at 307.
434. Id. at 350.
435. Perry concedes that this exception is "inconsistent with my hypothesis."
436. Perry, Economic Bias, supra note 3, at 1616.
437. But he also argues that the exception is "theoretically irrelevant."
438. Ames v. Union Ry., 117 Mass. 541, 541 (1875)
439. see also Mattingly v. Sheldon Jackson Coll., 743 P.2d 356, 361-62 (Alaska 1987) (noting old common law rule allowing recovery to employers).
440. Tullidge v. Wade, (1769) 95 Eng. Rep. 909, 909-10 (K.B.).
441. Warren A. Seavey, Liability to Master for Negligent Harm to Servant, 1956 WASH. U. L.Q. 309, 310.
442. See, e.g., Chelsea Moving & Trucking Co. v. Ross Towboat Co., 182 N.E. 477 (Mass. 1932). See generally Seavey, supra note 266, at 310-11 (arguing contractual liability theories have overtaken property liability theories in master-servant relationships).
443. Seavey, supra note 266, at 310 ("It is equally clear that a servant no longer regards himself as his master's man, but as an independent person who can bargain effectually. [T]he bond is primarily contractual with rights and duties in many cases spelled out in great detail.").
444. See Mattingly, 743 P.2d at 362 (Alaska 1987)
445. Phoenix Prof'l Hockey Club, Inc. v. Hirmer, 502 P.2d 164, 164-65 (Ariz. 1972)
446. Snow v. West, 440 P.2d 864, 865 (Or. 1968)
447. Atiyah, supra note 4, at 271-73 (analyzing reasons why employer should not recover economic loss resulting from an em-ployee's injury)
448. Seavey, supra note 266, at 311 ("The modern authority [permitting recovery], howev-er, is so slight as to be almost non-existent.").
449. See supra Part III.A.
450. See KNIGHT, supra note 28, at 301-02 ("[T]he wages of labor are in fact generally a fair approx-imation to a guaranteed contractual return.").
451. See generally Rhee, supra note 88 (proposing a principled basis of liability for negligent inflic-tion of emotional distress).
452. Union Oil Co. v. Oppen, 501 F.2d 558, 570 (9th Cir. 1974).
453. Yarmouth Sea Prods. Ltd. v. Scully, 131 F.3d 389, 398 (4th Cir. 1997).
454. Miller Indus. v. Caterpillar Tractor Co., 733 F.2d 813, 820 (11th Cir. 1984).
455. For example, a partner is not entitled to compensation for services performed for the partnership. UNIFORM PARTNERSHIP ACT § 401(h) (1997).
456. A mere interest in profit does not, however, create an ownership interest in an enterprise.
457. See Bradley T. Borden, Partnership Tax Allocations and the Inter-nalization of Tax-Item Transactions, 59 S.C. L. REV. 297, 313 (2008) ("The payment from the property owner to the service provider will be compensation for services regardless of the mode of determining the amount of the compensation.")
458. Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. POL. ECON. 691, 694 (1986) ("A firm may pay another firm or person by the piece or a fixed amount (salary), irrespective of the ownership of the machines.").
459. See Borcich v. Ancich, 191 F.2d 392, 393 (9th Cir. 1951) (noting action as "for wages and main-tenance"), overruled by Carbone v. Ursich, 209 F.2d 178 (9th Cir. 1953)
460. Goldberg, Recovery for Pure Economic Loss in Tort, supra note 6, at 274 ("[T]he fishermen's share is primarily compensation for la-bor not yet performed-that is, it is a substitute for future wages.").
461. See HENRY HANSMANN, THE OWNERSHIP OF ENTERPRISE 11 (1996) ("A firm's 'owners'. are those persons who share two formal rights: the right to control the firm and the right to appropriate the firm's profits, or residual earnings.")
462. KNIGHT, supra note 28, at 280 ("That is, in a sense, the entre-preneur's income is not 'determined'at all; it is' what is left'after the others are 'determined.'").
463. See Yarmouth, 131 F.3d at 398 (distinguishing fishermen on "lay" agreements from salaried dredge workers).
464. Henderson v. Arundel Corp., 262 F. Supp. 152, 160 (D. Md. 1966), aff'd 384 F.2d 998 (4th Cir. 1967) (finding no exception for salaried dredge workers)
465. Casado v. Schooner Pilgrim, Inc., 171 F. Supp. 78, 79 (D. Mass. 1959) (providing no recovery for sailors who "had no actual contracts for sea duty").
466. Mair v. Wood, (1948) S.C. 83, 85 (1st Div. 1947) (Cooper, L.)
467. see also Parker v. Walker, 1961 S.L.T. 252, 254 (O.H.) (characterizing enterprise between ship owner and fishermen as a "joint adven-ture").
468. Carbone, 209 F.2d at 179.
469. Yarmouth Sea Prods. Ltd. v. Scully, 131 F.3d 389, 398 (4th Cir. 1997).
470. Miller Indus. v. Caterpillar Tractor Co., 733 F.2d 813, 820 (11th Cir. 1984).
471. For example, in Carbone v. Ursich, the lay agreement gave the fishermen sixty-one percent of proceeds after specified expenses. 209 F.2d at 179.
472. Id. at 182
473. see also Pruitt v. Allied Chem. Corp., 523 F. Supp. 975, 978 (E.D. Va. 1981) ("The entitlement given these fishermen presumably arises from what might be called a constructive property interest in the Bay's harvestable species.").
474. Carbone, 209 F.2d at 180 & n.3 (citing Taber v. Jenny, 23 F. Cas. 605 (D. Mass. 1856) (No. 13,720)).
475. Taber, 23 F. Cas. at 608-09.
476. Id. at 608 (emphasis added).
477. Subsequently in Robins, Holmes rejected the Second Circuit's use of a trust analogy to provide the plaintiff remedy against the defendant dry dock. See Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 309 (1927), rev'g The Bjornefjord, 271 F. 682 (2d Cir. 1921).
478. Miller Indus. v. Caterpillar Tractor Co., 733 F.2d 813, 820 (11th Cir. 1984) (footnote omitted).
479. Perry, Relational Economic Loss, supra note 10, at 786. Notwithstanding this observation, Perry argues that fishermen should not be allowed to recover for their loss because "no rational distinction can be made between the interests of fishermen and the interests of other victims (such as fish restaurants, bait shops, tourist guides, hotels, and other businesses in the area)."
480. Union Oil Co. v. Oppen, 501 F.2d 558, 570 (9th Cir. 1974) (emphasis added).
481. Atiyah, supra note 4, at 256 n.26 (citing Parker v. Walker, (1961) S.L.T. 252 (O.H.)
482. Mair v. Wood, (1948) S.C. 83 (1st Div. 1947)
483. Main v. Leask, (1910) S.C. 772 (2d Div.)). Atiyah disapproves of the outcome of these cases because they seem irreconcilable with the time charter cases like Robins. Id. As discussed, however, there is a significant difference between contractual arrangements to rent property, where risk and return are contractually fixed, and arrangements to form a business association, where business risk is allocated through a profit share arrangement among owners. See supra Part III.A.
484. (1910) S.C. at 772.
485. Id. at 778-79 (Ardwall, L.) (emphasis added). This interpretation of the fishermen exception is also supported by the law of partnership, which provides a more accurate economic account than tort law's property-centric focus. A partnership is an independent economic entity distinct from its partners.
486. UNIFORM PARTNERSHIP ACT § 201(a) (1997). By sharing profit, fishermen are closer to partners in a joint venture than employees, independent contractors, or renters.
487. Id. § 101(6) (defining a partnership as "an association of two or more persons to carry on as co-owners a business for profit")
488. see also id. § 202(c)(3) ("A person who receives a share of the profits of a business is presumed to be a partner in the business."). Specifically, they resemble service partners. It is unclear whether the fishermen in these cases were partners for the purpose of partnership law, and the point may be speculative if the theory was not pursued, but the point is that economically the venture is owned by them.
489. Main, (1910) S.C. at 778-79.
490. Oppen, 501 F.2d at 570.
491. Such disparity of economic outcome during a common venture has long been recognized by common law judges:
492. The owner [of the ship] would at least get compensation to the extent of the value of his ship, with interest at 5 per cent from the date when she was lost; but the fishermen whom he employed on the footing that they were to share the profits of the fishing would not participate in that compensa-tion, and would, if the defenders'contention were well founded, get nothing at all except compen-sation for the loss of their personal effects.
493. Burgess v. M/V Tamano, 370 F. Supp. 247, 250 (D. Me. 1973) (internal quotation marks omit-ted).
494. See id.
495. Columbia River Fishermen's Protective Union v. City of St. Helens, 87 P.2d 195, 197-98 (Or. 1939).
496. See Masonite Corp. v. Steede, 23 So. 2d 756, 758 (Miss. 1945)
497. Hampton v. N.C. Pulp Co., 27 S.E. 538, 546 (N.C. 1943).
498. See supra note 269.
499. See Main, (1910) S.C. at 777 (Salvesen, L.) ("The ordinary crew of a trading vessel may have no difficulty in obtaining employment in other ships when the one in which they were engaged is sunk in a collision. ").
500. But see Burgess v. Florence Nightingale Hosp., [1955] 1 Q.B. 349, 357.
501. However, a business can protect itself through a key-person life insurance, and thus there are some ways in which this risk can be reduced.
502. For example, in 532 Madison Avenue, the employees of the deli could not claim for economic loss against the negligent construction company because they may have been laid off. 750 N.E.2d 1097 (N.Y. 2001).
503. Cf. MODEL BUS. CORP. ACT § 10.01(b) (2003) (providing that a shareholder "does not have a vested property right resulting from any provision in the articles of incorporation")
504. Grimes v. Donald, 673 A.2d 1207, 1213 (Del. 1996) (shareholders permitted to bring direct claims).
505. EASTERBROOK & FISCHEL, supra note 112, at 12
506. see also Coase, supra note 164, at 390-91.
507. See DEL. CODE ANN. tit. 8, § 122(2)
508. Bird v. Wilmington Soc'y of Fine Arts, 43 A.2d 476, 484 (Del. 1945) (corporation is distinct from its shareholders).
509. See Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423, 1428 (1993) (arguing that the "nexus of contracts" theory of the firm rejects the proposition that a corporation can be owned)
510. Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. CAL. L. REV. 1189, 1191 (2002) ("A lawyer would know that the shareholders do not, in fact, own the corporation.")
511. see also Margaret M. Blair & Lynn A. Stout, Specific Investment: Explaining Anomalies in Corporate Law, 31 J. CORP. L. 719, 728 (2006) ("The claim that shareholders are 'principals'and directors are' agents'contradicts the realities of cor-porate law.").
512. See generally Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE L.J. 387 (2000).
513. See supra notes 266-267 and accompanying text.
514. The loss of the Internet for a significant period may result mostly in a transfer payment for cer-tain activities such as selling books, which are sold through other distribution channels. However, since we do not expect the loss of the Internet (vis-à-vis ordinary use limitations) anytime soon, this hypothet-ical may perhaps be academic.